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If Price is All You Have...What Exactly Do You Have?

So much of what happens in investing is all about price - the price of a stock, the price of a bond, the price of whatever…if the price is going up then that must be good - BUY! If the price is going down that must be bad - SELL! As if all you need to know to be a good investors is whether the price is going up or down.

Now, in investing there are many ways to get to heaven, and nothing said here is intended to disparage trend following, or momentum, or other short-term trading strategies. I'm sure there are investors who are very good at making money using those methods. I'm also sure that the investors who are very good at making money using those methods have a very disciplined, rigorous approach that's grounded in rules and process. That's not most investors.

If price is all you have - meaning that you don't know anything about the company or its financial performance or fundamental characteristics - what do you really have? If you buy because the price is going up, when will you know it's time to sell? If you sell because the price is going down, when will you know it's time to buy? Sorry but securities prices don't move in straight lines. Nobody rings a bell to tell you when the top is in; there is no "this is the bottom" announcement. If price is all you have, and it's your only signal for when to buy or sell, maybe you can make money but it's very hard to do so consistently - and you can be very sure that you'll rack up plenty of trading costs (either in commissions, or bid-ask spread, or both) and your tax bills (if you make money) will be short-term gain, not long-term.

By now you'll have figured out that we do not rely on price to make speculating investing decisions. We prefer to hang our hat on other things - like cash generation…or asset appraisals…driven by deep research and data analysis. Things that can give us some degree of confidence about value. We prefer to ask the question: when I pay this price, what value am I getting in return?

Still, there is one thing price can tell us: it can tell us about risk. More specifically, it can tell us what other investors think about risk. When the price of a stock keeps going up, even though the company makes no money, and its prospects for making money any time soon are not good, we can infer that investors don't care too much about risk (SPAC craze of 2020-21 anyone?). On the flip side, when price is low even for a company with decent long-term prospects, we can infer that investors might be overestimating risk (example: Alphabet nee Google circa 2011-12 when investors were anxious about search moving from PCs to mobile devices). Neither scenario is a good signal in and of itself - they are situations that demand more research - but they provide useful information nonetheless. As investor Howard Marks often says, we may not be able to predict the future but we can certainly look around and see what others are doing. And sometimes what others are doing creates opportunity – which is reflected in the price.

Yet it's always surprising to me how data seeking, intelligent, rational business owners suddenly become price chasing day traders when presented with a stream of stock quotes. The constant stream of prices…that some just cannot seem to resist.

So - are you going to let price lead you around by the nose? Cause if that's all you have, you're going to wind up with a pretty sore nose.


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